CMS Responds to States’ Drug Pricing Proposals

Manatt on Health: Medicaid Edition


The Trump administration (the Administration) has called for a reduction in drug spending. In May, the Administration released a “blueprint” to reduce drug prices that included proposals for cutting Medicaid drug costs.

In practice, however, federal efforts to curtail drug prices in Medicaid have yet to match the Administration’s rhetoric. In late June, the Centers for Medicare and Medicaid Services (CMS) made three important decisions on Medicaid drug coverage and reimbursement. First, CMS rejected a proposed Section 1115 waiver of drug coverage requirements submitted by Massachusetts. Second, CMS issued guidance confirming that drugs approved by the Food and Drug Administration (FDA) under an accelerated pathway need to be covered by states. Finally, CMS approved Oklahoma’s state plan amendment (SPA) regarding value-based purchasing (VBP) and drugs.

Denial of Massachusetts Waiver Request

In seeking an amendment to its 1115 demonstration, Massachusetts requested to waive the requirement under Section 1927 of the Social Security Act—the provision that regulates drug coverage and payment under Medicaid—that state Medicaid programs cover nearly every FDA-approved drug of a manufacturer that has signed the CMS rebate agreement. Massachusetts, however, sought to retain the requirement under Section 1927 that manufacturers pay minimum rebates to states, which must be at least 23.1% of the drug’s price for brand-name drugs and 13% for generics. In effect, Massachusetts aimed to modify the existing accord between states and pharmaceutical manufacturers that Section 1927 established and through which manufacturers get guaranteed formulary placement of their drugs in exchange for states getting guaranteed discounts.

In rejecting a partial waiver of Section 1927, CMS indicated that states cannot waive just one side of Section 1927 requirements—namely, keeping the guaranteed rebates while permitting closed formularies. However, CMS made clear that it is open to permitting demonstrations that do not require states to adhere to Section 1927. As CMS indicated in its letter to Massachusetts, if a state agreed to “forgo all manufacturer rebates available under the federal Medicaid Drug Rebate Program,” the state “could then be provided flexibility to exclude specific drugs from coverage based on cost-effectiveness or other approved criteria, or to employ a closed formulary structure similar to Medicare Part D or commercial plan formularies.”

Given the rejection, the question is whether any states will take up CMS on its offer. First, preparing and implementing 1115 demonstrations can require a significant time commitment and high levels of administrative expense. In addition, due to other federal rebate provisions and state “supplemental” rebate agreements, actual discounts received by states are typically well above the floors of 23.1% for brand-name drugs and 13% for generics; instead, they are close to 50% on average. Notably, the Medicaid and CHIP Payment and Access Commission (MACPAC) has expressed uncertainty as to whether such a demonstration would actually save states money and plans to study this question. On the other hand, some states may believe they can obtain even better discounts if they have the leverage over manufacturers to deny coverage of drugs entirely. Notably, states will have to demonstrate to CMS that the waiver would be budget neutral—meaning the state will need to achieve discounts without the Section 1927 mandated rebates equal to or greater than they would have achieved with the Section 1927 mandate.

Accelerated Approval Pathway for Drugs Subject to Section 1927

CMS also issued guidance to states under which CMS declared that drugs approved by the FDA under an accelerated pathway are subject to the access protections of Section 1927, such as the requirement to cover such drugs on state formularies as discussed above. Federal law allows the FDA to grant accelerated approval to drugs that treat serious or life-threatening conditions; many drugs approved under such a pathway treat rare diseases. There was a technical legal argument that Section 1927 might not apply to drugs approved under an accelerated pathway, but in the guidance CMS rejected that argument.

CMS’s guidance was another setback to Massachusetts, which had noted in its waiver request that it was considering denying coverage of drugs approved under the accelerated pathway out of the belief that such drugs have not been proved to be efficacious.

Value-Based Purchasing in Oklahoma

Also in June, CMS announced its approval of a SPA for Oklahoma’s Medicaid program that allows the state to use its supplemental rebate agreements with manufacturers to engage in VBP. In the context of drug policy, a VBP arrangement means that the state’s payment for a drug varies based on the clinical effectiveness of that drug when administered to Medicaid beneficiaries in the state. No details about Oklahoma’s proposal were released, and it is unclear as to whether any manufacturers have begun discussions with Oklahoma to enter into VBP agreements with the state. Nevertheless, CMS’s decision to highlight the approval in a press release after focusing on VBP in its drug blueprint confirms that the Administration views VBP as a potential solution to cutting costs while maintaining access. In effect, CMS anticipates that states can reduce drug spending by lowering payments for drugs in cases where those drugs did not work as expected.


CMS’s three recent decisions regarding Medicaid drug coverage and reimbursement show that reducing drug costs is not easy to achieve. While cutting drug costs may be a high-level aim for the Administration, in reality, legal protections mandating broad coverage of drugs make achieving that goal a challenge.



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